Why The SEC Will Force Facebook To Go Public (GS)

We think this offering will inevitably result in the SEC forcing Facebook to register as a public company and disclose its financials as soon as it crosses the 500 shareholder mark.

The next question is…Why does the SEC care if Facebook has 500 shareholders or not?

The short answer is to protect shareholders who are either too poor, dumb, or inexperienced to own Facebook stock.

Let us explain.

The point of forcing public companies to disclose their finacials is to safeguard shareholders from scams and other fraud – to insure that investors know what they own, are about to buy, or about to sell.

But you could argue that Facebook shareholders don't need protecting.

After all, to buy Facebook shares at this point, while the company is still private, Facebook investors must be declared "accredited investors."

Michigan law professor Adam Pritchard, one of the top securities law professors in the country, tells us the point of the 500 shareholder threshold is to protect the people who own Facebook shares AFTER these accredited investors are done with them.

Professor Pritchard tells us the government can't force accredited investors to not sell their Facebook shares and it can't really decide who these accredited investors sell their stock to. Also, sometimes these accredited investors die and non-accredited investors inherit their assets. These heirs may have to sell them.

The SEC believes that after a large-ish number of shareholders exist, it is inevitable that some of their assets will make their way into the "public" – and thus a market is born.

There's no science to the 500 number, other than its somewhat large – large enough that people who are not "accredited investors" will end up having to make decisions about whether or not to own Facebook stock.

Given that this protective stance is the motivation behind the SEC's rule and given the way Facebook shares are flying all over the place, we think it will be no time till the SEC forces the company's hand and requires them to disclose.

Anyway, after Facebook is forced to disclose, it might as well offer some of its second-class, non-voting stock to the public markets. When that happens, some early Facebook investors and employees are going to get very, very rich.